I have written about Gold – both positive and negative fundamentals, with a skew to the bullish camp, albeit, several times since 2007. So let me share with you a recent excellent piece from the most recognized Gold Bullion bull that I have ever come to know, Mr. John Embry. I worked with John back in mid 1990’s when at the time he was just as bullish. Well, hat tip to you, John, for being right for so long. But what does the future for the bullion hold?
REASONS TO OWN GOLD
The fundamentals for gold are impeccable,
the long term technical picture is exceptional
and gold remains very inexpensive when
compared to almost every other alternative.
I expect gold to trade at several multiples
of the current price before this bull market
breathes its last breath.
By: John Embry, Chief Investment Strategist, Sprott Asset Management LP
1. GOLD IS RETURNING
TO ITS TRUE HISTORIC
ROLE AS MONEY
The role of gold in society was succinctly
summed up by J.P. Morgan in 1912 when
the renowned financier stated that “Gold
is money and nothing else.” Ironically,
he made that comment one year before
the U.S. Federal Reserve was created.
There have been long periods (1980-
2000 being one) when this immutable
fact was dismissed. The fact remains,
however, that every fiat currency system
in history has ended in ruins. Our current
experiment seems to be headed down the
same disastrous path, thus allowing gold
to reemerge as a currency once again.
2. THE INEVITABILITY OF A
COLLAPSE IN THE U.S. DOLLAR
The U.S. dollar is the world’s reserve
currency and thus anchors the world’s
monetary system. Unfortunately, by
virtually any measurement we look at,
the United States is beyond ‘the point
of no return’ with respect to its financial
position. Imbedded federal government
debt of nearly $13 trillion, unfunded future
liabilities in medicare, social security, etc.
well in excess of $50 trillion and a current
budget deficit of over 10% of GDP virtually
ensures ongoing massive monetary
debasement. When the near bankruptcy
of the majority of the fifty states in the
union is factored in, the situation looks
even more dire.
3. OTHER SIGNIFICANT WORLD
CURRENCIES OFFER NO REFUGE
The current travails of the European Union
are well advertised. The recent pledge of
nearly $1 trillion in potential bailout money
by Eurozone members and the IMF in the
wake of Greece’s problems, coupled with
the fear of contagion throughout southern
Europe, effectively disqualifies the
Euro from serious consideration. Great
Britain is in such disarray that it doesn’t
even deserve comment. Japan has a
rapidly aging population and embedded
government debt that already exceeds
200% of GDP. Even China, that paragon
of all things financial and economic, is
suspect. As the result of its bank lending
spree in 2009, the country is dealing with
considerable overcapacity, an emerging
inflation issue and a potential bad debt
crisis in its banking system.
4. THE DESTRUCTION OF
GOVERNMENT BALANCE
SHEETS AND THE WIDESPREAD
IMPLEMENTATION OF ZERO
INTEREST RATE Policies MAY
ULTIMATELY RESULT
IN HYPERINFLATION
As the result of the global financial crisis
which enveloped the world between
late 2007 and early 2009, the world’s
governments were forced to step in
and bail out the financial sector while
propping up overall demand in the face
of the collapse in the private sector.
This unfortunately occurred as their own
revenue streams were under severe
pressure due to the issues in the private
sector. To combat the massive deficits
that inevitably resulted, widespread
quantitative easing (i.e. unfettered money
printing) was undertaken. That policy is
here to stay and the fiscal deficits in many
countries have now reached percentages
of GDP that have almost always resulted
in eventual currency collapse. Thus, the
frightening term ‘hyperinflation’ is now
being heard with increasing frequency.
5. THE TRUE IMPACT OF THE
MALIGN SIDE OF DERIVATIVES HAS
YET TO EXPRESS ITSELF
Remarkably, the notional value of
derivatives has continued to grow, both
throughout the global financial crisis and
during the ensuing recovery period. The
fact that derivatives played a major role
in the financial meltdown seems to have
been conveniently forgotten. Attempts
to regulate OTC derivatives, which
Congressional committees have been
warned are “ticking time bombs” and
“financial weapons of mass destruction,”
surprisingly continue to meet resistance.
The fact that many derivatives are
essentially worthless but are being carried
on the books as ‘marked to model’ is
creating an extremely distorted picture of
the health of the financial sector.
6. INVESTMENT DEMAND FOR GOLD
IS RAPIDLY ACCELERATING BUT
WE’RE ONLY IN THE EARLY STAGES
OF THIS PHENOMENON
Despite the fact that gold has been rising
steadily for ten years and sophisticated
investors are climbing aboard to protect
themselves from the ravages of monetary
debasement, conventional institutions and
the average citizen remain largely unaware
of gold’s utility. When the next leg of the
global financial crisis arrives and stocks
and bonds come under severe pressure,
investment demand for gold could
potentially rise exponentially. To facilitate
this demand, new gold investment vehicles
are being created including the very well
received Sprott Physical Gold Trust (see
disclaimer).
7. GROWING RECOGNITION THAT
MANY PAPER GOLD PRODUCTS DO
NOT HAVE THE GOLD BACKING
THAT THEY PURPORT TO HAVE
At the March CFTC hearing with respect
to position limits on gold and silver on the
Comex, Jeffrey Christian of CPM Metals,
advertised on his firm’s website as “an expert
on precious metals”, openly acknowledged
that transactions on the London Bullion
Market Association (L.B.M.A.) are minimally
backed by available physical gold. Given
that the L.B.M.A. has long been regarded
as the exchange where physical gold is
transacted, that qualifies as a remarkable
admission. Investors should also have
strong reservations about gold ETF’s,
gold pooled accounts and gold certificates
where the gold is unallocated and thus not
specifically accounted for.
8. MINE SUPPLY IS NOT
ANTICIPATED TO RISE FOR
SEVERAL YEARS, IF AT ALL
Despite gold prices surging from a low of
$252 per ounce in 1999 to over $1,200
recently, mine production has been eroding
for nearly a decade. This suggests that mine
supply is insensitive to higher gold prices,
a fact confirmed in the 70’s when mine
supply actually fell as gold made its historic
rise from $35 per ounce to $850. Aaron
Regent, the head of the world’s largest
gold company, Barrick Gold, was quoted
at a conference in late 2009 lamenting
the state of the gold mining business. He
went so far as to suggest that global gold
production was in terminal decline despite
record prices and the Herculean efforts
by mining companies to discover new ore
bodies in remote areas. He actually alluded
to “peak gold” by implying that production
has already reached levels that can’t
be exceeded, an expression that is now
commonplace in the oil industry.
9. CENTRAL BANKS ARE NEARING
AN INFLECTION POINT WHERE THEY
WILL NO LONGER BE IN A POSITION
TO SUPPLY THE GOLD NECESSARY TO
KEEP THE MARKET IN EQUILIBRIUM
The western central banks, who have
supplied massive quantities of gold to the
market over the past fifteen years, both
to meet burgeoning demand and to suppress
the price, are running dangerously short. Their
activities were reminiscent of the late 60’s
when central banks expended over 100 million
ounces in an ultimately failed attempt to hold
gold at $35 per ounce. We believe that this
time they disposed of far more gold and did so
clandestinely, employing swaps, leases and
opaque accounting. This era’s central bankers
have obviously learned nothing from the past but
are clearly considerably more desperate due to
the dramatically worse situation on the financial
and economic fronts. It is telling that the annual
selling quotas under the European Central Bank
Agreement are 400 tonnes per annum and the
banks, after meeting their past quotas for years,
are selling nothing.
10. INCREASING LIKELIHOOD OF
ACCELERATING PURCHASES OF GOLD
BY EASTERN CENTRAL BANKS
The enormous concentration of U.S. dollars in
the reserves of a number of Asian central banks
in conjunction with low gold exposure virtually
ensures that they will be more aggressive
purchasers of gold in the future. Russia and
China have already revealed their intentions
and India may have stolen a march on everyone
when it announced late last year that it had
purchased 200 tonnes of the well advertised
IMF sale. What appears to be a huge swing
from collective heavy selling by the central bank
community to net accumulation is going to have
an extremely salutary impact on the gold price.
11. INCREASING SKEPTICISM ABOUT U.S.
GOLD RESERVES
The U.S. has long been the world’s largest gold
holder with a current reported position of 8,133
tonnes (over $300 billion worth). However,
there have been recurrent rumors that the
U.S. has mobilized an unknown portion of their
gold reserves via swaps to facilitate leasing, a
key component in the gold price suppression
scheme. The absence of any outside audit of the
reserves since the 1950’s and the Fed’s current
intransigence towards being subjected to an
audit only heighten suspicions that the U.S. does
not have nearly as much gold as they claim.
12. LARGE SHORT POSITIONS
Despite dramatic de-hedging by the gold
producers, whose original excessive hedging
was ostensibly the reason for the proliferation of
gold derivatives, the notional value of OTC gold
derivatives still remains elevated. This suggests
either a major legitimate bet against the secular
trend of the gold price or ongoing nefarious
activity (i.e. price suppression by the usual
suspects). The existence of large concentrated
short positions on the Comex held by a few
bullion banks makes it reasonable to assume
that it is the latter. If the longs were to ever to
call for delivery, the shorts’ position would be
extremely problematic due to the increasing
physical shortage of gold.
13. INCREASING RECOGNITION OF THE
FACT THAT THE GOLD PRICE HAS BEEN
SERIOUSLY SUPPRESSED
More and more members of the financial
establishment have been forced to concede
that gold has been subjected to constant price
management by western governments, their
central banks and their bullion bank surrogates.
The increasingly egregious activities in this area
are forcing any thoughtful person to acknowledge
what is occurring. The work of the Gold Anti-
Trust Action Committee (GATA), which has been
remarkably accurate over the past ten years,
is finally receiving belated acknowledgment
following years of being studiously ignored. The
extent of the suppression has been so great
that it virtually guarantees a far greater upward
explosion in the gold price than would otherwise
have occurred.
14. THE SUPPRESSION IS EVIDENT
IN THE CONTINUING EXTREME
UNDERVALUATION OF GOLD
Measured by any number of metrics (gold price
in relation to the staggering amount of money
and credit that has been created over the past
several decades, gold’s extreme undervaluation
relative to platinum, the gold producers’ pathetic
returns on capital at the current price, etc.), gold
is far behind where we believe it should be. If
gold had merely kept up with the reported rate
of U.S. inflation since its peak price in 1980, it
would presently be trading in excess of $2,300
per ounce.
15. THE RELATIVELY SMALL SIZE OF
THE GOLD MARKET
In the past, gold’s small market footprint has
actually been a negative because it more
easily facilitated the price suppression activity.
This is about to change, however, as gold
becomes the asset of choice for more and more
investors for all the aforementioned reasons.
All the gold mined since the beginning of time
is worth less than $6 trillion currently and the
total capitalization of all the world’s gold stocks
barely exceeds that of Walmart. This pales in
comparison to the amount of paper money that
could seek refuge in the world’s eternal money.
16. GOLD IS IN AN ESTABLISHED
POWERFUL BULL MARKET
Gold is in the tenth year of a powerful bull
market since it double bottomed at just over
$250 per ounce in early 2001. It is most
definitely a stealth bull market as the sentiment
remains remarkably subdued, a fact illustrated
by an extensive worldwide poll conducted by
Commodities Online in the spring of 2010 that
revealed that 93% of the respondents expected
the gold price to fall. Gold has been climbing a
classic “wall of worry”, a climb made steeper by
the stout resistance of the anti-gold cartel and
the constant negative propaganda emanating
from its mainstream apologists.
17. GOLD HAS ENDURED
Gold is indestructible, possesses a high value to-
weight ratio (which makes it easy to store
and transport), is not anyone’s liability, can be
easily hidden (which has been a considerable
attribute in the past) and, most importantly, has
provided protection against the destruction of
wealth for centuries.
CONCLUSION
The fundamentals for gold are impeccable,
the long term technical picture is exceptional
and gold remains very inexpensive when
compared to almost every other alternative.
I expect gold to trade at several multiples
of the current price before this bull market
breathes its last breath.
Saverio Manzo
http://saveriomanzo.com/
http://saveriomanzo.blogspot.com/
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